22 March 2013

EFRAG comments on the transition from IAS 39 to IFRS 9 for macro-hedging practices

While the IASB is considering portfolio hedging strategies and developing appropriate hedge accounting to reflect best those hedging strategies, EFRAG believes no change should be mandated, so as to avoid the cost and the disruption caused by successive changes in financial reporting requirements. EFRAG therefore believes it is necessary that entities be granted the ability to maintain in all circumstances the status quo regarding existing IAS 39 compliant portfolio hedge accounting practices until the project on macro hedging is completed.

The input received from constituents in this supplementary consultation has led EFRAG to note the following:

(a) Significant uncertainty exists as to whether existing IAS 39 compliant portfolio hedge accounting practices (such as portfolio cash flow hedges, hedges based on Section F of the Implementation Guidance (e.g. F.6.2 and F.6.3) and proxy hedging) will continue to be possible under the Review Draft.

(b) There is a significant risk that entities will be required to change their IAS 39 compliant portfolio hedge accounting practices twice (i.e. once upon finalisation and adoption of the general hedge accounting requirements and once again when the macro hedging project is completed) and that entities might be required to make significant systems investments in order to meet the disclosure requirements regarding proxy hedging.

(c) The term ‘macro-hedging’, for which there is not a single universally applied definition in practice, would need to be defined as part of the development of the discussion paper on macro-hedging. The term alternatively refers to either what is being hedged – open portfolios and/or net positions that arise from them – or the hedge accounting technique that is used – transaction-by-transaction or otherwise. Furthermore, EFRAG notes that defining a ‘macro-hedge’ as a hedge of an open portfolio may not be the most appropriate approach as most closed portfolios can easily be made ‘open’; thereby rendering the definition ineffectual for the purpose of setting the scope of standards.

(d) The respondents in the field test confirmed that the Review Draft introduces important improvements in the hedge accounting requirements such as: (a) improvements in the hedge effectiveness testing requirements; (b) the treatment of the time value of options and the treatment of forward points; (c) the possibility to designate aggregated exposures as eligible hedged item; (d) the ability to designate risk components as an eligible hedged item; and (e) the ability to rebalance hedge relationships.

EFRAG has concluded that the most straightforward and practical way of ensuring that existing IAS 39 compliant portfolio hedging practices would not be affected by the Review Draft would be to provide entities a simple choice, either (1) to retain IAS 39 hedge accounting for all of their hedges until either they decide to apply IFRS 9 irreversibly or the project on macro hedging is completed or (2) to adopt irreversibly the requirements of the Review Draft as drafted (including the exception in paragraph 6.1.3 on portfolio fair value hedges of interest rate risk).

This approach provides certainty that entities can continue to apply IAS 39 compliant portfolio hedging practices until the project on macro hedging is completed, without incurring the cost of considering whether their current IAS 39 compliant practices are compliant with IFRS 9 and without running the risk of having to incur the costs of changing their portfolio hedge accounting twice. In addition, it avoids:

(a) the complexity that would arise from the interaction between the scope and the requirements of IAS 39 and IFRS 9;

(b) the potential drawbacks of grandfathering IAS 39 practices into IFRS 9 without due consideration;

(c) the risk of giving rise to an accounting approach that mixes-and-matches elements of IAS 39 and IFRS 9 on a transaction-by-transaction basis; and

(d) any tainting of the fundamental objective of IFRS 9 that hedge accounting should reflect risk management practices.

Finally, EFRAG believes that macro-hedging is important for European financial institutions and needs to be put on a solid conceptual footing. Therefore, the IASB should continue with its macro-hedging project and to consider without prejudice both fair value hedge accounting and cash flow hedge accounting. While EFRAG notes that IASB’s discussions to date on the macro-hedging project have focused on macro fair value hedging for interest rate risk, EFRAG believes that IASB should fully consider all aspects of macro-hedge accounting – and its definition – without further delaying finalisation of IFRS 9.

Press release

Full comment letter

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